Charities have urged ministers to guarantee all their deposits held in Icelandic banks after it emerged that many millions of pounds of donations may be lost in the financial crisis.

The National Council of Voluntary Organisations (NCVO), which represents the entire sector, said at least £120 million of charitable funds had been frozen and may be lost.

Some of the charities who had been hit were small, with the amounts representing a large proportion of their operating income or reserves, it said.

Most charities are required by their trustees to hold a large sum of money in reserve because their income from donations is so volatile. However, most are reluctant to talk about reserves in case potential donors think they have enough money already.

Stuart Etherington, chief executive of NCVO, said the issue of Icelandic deposits had to be addressed immediately.

“There are two sets of issues. The first and most immediate is that, like local authorities, charities had money in Icelandic banks. They weren’t as comprehensively advised as some local authorities so I think there is a case for some mechanism to compensate them for that. We are talking to the Treasury currently about that and are seeking a scheme which would help those charities with holdings in Iceland,” he said.

Ministers have said the fact that local authorities have access to top quality financial advice means they are not in the same boat as individual investors and refused to bail them out. The Government has already guaranteed all deposits held by individuals.

There has been some good news for smaller charities, however. The Financial Services Authority has said if they are registered as limited companies as well as charities, they will be entitled to some money back under its compensation scheme.

Most charities are structured in that way to limit the financial exposure of the trustees. If their turnover is not more than £6.5 million and they have not more than 50 employees, they will get £50,000 back under the Financial Services Compensation Scheme.

But Mr Etherington said there were not wider issues for the sector. Demand for services from charities has already rocketed over the last year. Citizens Advice reported yesterday that its centres had seen a 50 per cent jump in the number of people seeking help about mortgage arrears, for example.

The surge in demand had coincided with fears donations would dry up as households cut back on spending.

“Demand for charitable services is going up and the amounts of money available to them may go down. We need to work out what charities can do, how they can work more collaboratively and try to reduce costs.”

He said the Government had a role to play, especially when it comes to the tax regime that operates around donations.

One report discovered a third of charities have already seen a fall in donations from individuals since the credit crunch hit.

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